How does Big Tobacco see its future? Guest blog by Jonathan Fell

What is the tobacco industry up to? Let’s ask someone from the City who knows about it…

Note from Counterfactual. There’s much speculation and theorising from public health academics about what the tobacco industry is doing and what motivates it. But this often based on a simplistic understanding of business, markets and how the industry (indeed any industry) works, and seasoned with selective reading of now-dated industry documents. I thought we might gain more by asking an analyst and investor for his views. So here is a guest post from Jonathan Fell, a former City of London investment bank equity analyst with over 20 years’ experience following the tobacco industry and other consumer packaged good companies. He now manages a fund, in which he himself invests, that owns shares in a number of consumer companies, including tobacco stocks.

These are Jonathan’s own views. This piece is not intended as investment advice, nor should it be taken as such.

Professor Chapman may well be overstating the extent to which growth in the global market for next-generation nicotine products is slowing, particularly if the success of Philip Morris International’s ‘heat-not-burn’ product in Japan is taken into account. He is almost certainly significantly over-simplifying the debate over why kids start smoking or vaping when he writes that the…

…business model is . . . intriguing young people who have never used any nicotine product and who are increasingly never likely to.

I would like to address Professor Chapman’s views on the behaviours of the tobacco industry; he makes many of the classic errors of those commentating from a public health perspective.

Abuse of history and contemporary sources

There is a particular strand of research in the public health sphere that focuses on digging through tobacco industry documents, usually to make the case that the industry’s behaviour is cynical and deliberately and permanently calculated to frustrate legitimate health goals. This work gets published in medical journals but it is really a version of history – except the most unhistorical history imaginable, where the conclusion often appears pre-determined and voices opposing that conclusion are excluded on the grounds they must be biased (‘vested interests’) and it’s already been determined that they can’t be trusted.

Imagine, for example, writing an account of the tobacco industry’s involvement in the snus category concluding that tobacco companies“have eliminated competition between cigarettes and lower-risk products” without talking to any of the people actually involved in those initiatives, and ignoring many of the contemporary financial materials which would quickly show that much of the factual basis of the account was simply wrong (not least because cigarette volumes in Sweden and Norway are still shrinking while snus is still growing, and the former monopoly snus provider Swedish Match has been losing share year after year).

Professor Chapman shows a similar affection for dredging up old documents, produced when many current senior tobacco executives were barely out of nappies, let alone employed in the tobacco business. But on this occasion it’s his somewhat casual approach to more contemporary sources which has to bear the weight of his central contention: that the tobacco industry’s involvement in new products such as e-cigarettes is a cynical ploy designed to prolong the profits of the conventional cigarette business.

Professor Chapman starts with a 2012 quote from Kingsley Wheaton, then BAT’s Director of Corporate and Regulatory Affairs and now Managing Director, Next Generation Products:

Our core business is, and will remain in, tobacco.

But Professor Chapman has omitted a rather important qualifier from Mr Wheaton’s remarks; what Mr Wheaton actually said was

Our core business is, and will remain in, tobacco but we’ve always made it clear that our goal is to provide those adult smokers who are seeking safer alternatives to cigarettes with a range of reduced-risk products that will meet their varying needs.

Had he actually talked to anyone at BAT (or any of the financial analysts following them) about the company’s views on next-generation products, Professor Chapman would also have realised that Mr Wheaton’s remarks were grounded in the mathematically obvious, given the relative sizes of the combustible tobacco and e-cigarette markets at the time. Professor Chapman has visited BAT’s website for his figures on the sizes of the combustible and e-cigarette markets, but appears to have overlooked the Next Generation Products section that states BAT’s contemporary views:

Traditional tobacco has been the mainstay of our business for more than 100 years – and will continue to be so for a long time to come. However, we also see huge potential in Next Generation Products, which include Vapour Products like e-cigarettes.

At least BAT’s website got a visit; Professor Chapman’s take on PMI’s recent investor day seems to come entirely second-hand, via an article on the website of the Motley Fool investment firm, from which he draws the conclusion that:

Philip Morris planned to have cigarettes ‘keep bringing in the bulk of its revenue for years to come.’

That piece, titled PMI’s future in the cigarette market, was written by Dan Caplinger, a contract writer for Motley Fool and the firm’s Director of Investment Planning, with a background as an estate-planning attorney and independent financial consultant. I don’t doubt Mr Caplinger’s experience in financial planning, but it’s not clear that he’s the most expert commentator when it comes to the tobacco industry.

The Motley Fool article focuses on one aspect of PMI’s investor day, all the slides and prepared remarks for which are available on the company’s website here.

Slide 2 of PMI’s CEO presentation, September 2016

Essentially the first thing that André Calantzopoulos, PMI’s CEO, said in his presentation (the first of the day) was this:

. . . we will continue to lead the combustible product category, leveraging the great strengths of our existing business to deliver against our current growth algorithm. We also aim to become the undisputed leader of the Reduced-Risk Product category with the highly ambitious objective of having RRPs ultimately replace combustible products to the benefit of adult smokers, society and our company.

That’s a much fairer reflection of the content of PMI’s investor presentations: the company of course remains focused on its traditional business, but is also investing very heavily in next-generation products.

Is ‘dual use’ the real goal?

Professor Chapman has long been insistent that:

The very last thing that Big Tobacco hopes for harm-reduced nicotine products is that they will cannibalise their mainstay cigarette markets. Instead, the business model is dual use (people smoking where and when they can’t smoke, and vaping when they can’t).

But just because dual use is happening doesn’t mean that this is something that has been engineered by the tobacco industry. Much more likely is that the e-vapour products which are currently available to consumers are not yet good enough to encourage most smokers to quit smoking entirely and use only vaping devices. That is something that I think all of the tobacco companies currently involved in the e-vapour category admit; the better e-vapour (or ‘heat-not-burn’) products get, the fewer consumers will feel the need to continue using combustible products.

PMI produced data showing that in Japan the proportion of users of its iQOS ‘heat-not-burn’ product who have converted either fully or predominantly has increased over time due to increasing awareness levels among smokers as well as PMI’s own communication efforts becoming more effective as it has learned from experience.

Slide 17 of PMI’s 2016 investor day presentation on the Asia Pacific region

Source: Philip Morris International

It appears we are at a relatively early stage in the innovation cycle, and there is a lot of room for products to improve and deliver a better experience for smokers. For instance, PMI revealed in its September investor presentations that it is about to start marketing its new MESH technology in the UK:

The MESH heating technology is a completely new approach to e-vapor generation and will be the core engine in our next generation e-vapor platform. E-liquid is precisely heated on a metal alloy mesh imbedded in a cartridge . . . this novel technology ensures the consistency and quality of the aerosol generated.

And at the recent GTNF event in Brussels, Dr David O’Reilly, Group Scientific and R&D Director at BAT, predicted that the coil and wick system currently used in virtually all e-vapour products will go in the next two years.

E-vapour products still need to improve; ‘ultimately the consumer will decide’

The tobacco / nicotine industry is currently subject to technological change in a way that it probably hasn’t been since the invention of the Bonsack cigarette-making machine in 1880, which started the very long decline of the chewing tobacco market. Current industry protagonists have no choice but to get heavily involved in these new products; as the rise of the e-vapour market has already shown, if they don’t then smaller companies will come in and take the market from them instead. The key point here is that, as BAT put it last year,

ultimately the consumer will decide what they want

There is nothing that the tobacco industry will be able to do to convince people to continue using combustible products if there is an attractive alternative product that offers consumers most of the sensory benefits of cigarette use with a small fraction of the risk.

Professor Chapman sees further evidence of cynicism when it comes to tobacco industry involvement in next-generation products because those same companies continue to compete in the combustible cigarette market and lobby against certain regulatory initiatives. So,

if the industry really cares deeply about the deaths of its customers, this care is not enough to do anything to stop it selling the deadliest forms of nicotine delivery, nor to desist from its major attacks on tobacco-control policies it knows are the most effective in reducing smoking.

But this kind of argument implies an unwillingness to consider the world as it actually is. It’s not surprising that PMI, BAT and others remain committed to their conventional cigarette businesses: they are producing a product that consumers want to smoke, helping to generate tax income for governments that need revenue, and producing cash flows for shareholders that want dividends. Would demand for cigarettes disappear if major tobacco companies stopped manufacturing them tomorrow? Highly unlikely, as pretty much every other experience of attempted prohibitions of alcohol and other drugs has shown. Nor would shareholders allow managements to cease selling combustible cigarettes in the absence of realistic alternatives for consumers.

Moreover, very substantial sums of money need to be invested in R&D, innovation and marketing in order to commercialise next-generation products successfully, and manufacturers need to find a way to get these products in the hands of consumers. The combustible cigarette business is important in providing the necessary cash flows, expertise and access to distribution.

The evidence of plain packaging having any impact on smoking rates is extremely thin, but it certainly takes away intellectual property from tobacco companies and removes a means of their competing effectively against each other. So I would expect the industry to go on challenging the introduction of plain packaging, not least because even if they’re unsuccessful the cases can help to clarify the basis for future legitimate competition in the inevitable event that some tobacco control campaigners decide that further restrictions are required (see How the tobacco industry is gaming Australian health regulations). And it also slows down the introduction of still more problematic – and perhaps just as ineffectual – endgame measures.

The same goes for tax increases: I don’t know any major tobacco company that “demonise(s) tobacco tax rises”, and the position of virtually all of them is that they oppose sudden and steep increases, or increases from an already very high base, because they penalise consumers and also because of the obvious risk that they exacerbate black market problems. Bizarrely, in Missouri earlier this month Public health organisations opposed Tobacco tax increase ballot measures, in part because of the fact that they were supported by the tobacco industry.

Why are tobacco companies investing in next-generation products?

This article (and Professor Chapman’s column) has focused on PMI and BAT, but the other two major international tobacco companies are also heavily committed to investing in next-generation products, albeit with different nuances (see the recent investor day presentation for Japan Tobacco, or Imperial Brands’ investor day presentation on New Consumer Experiences).

I think the large tobacco companies are investing in new products because:

Like other consumer companies, they are in the business of responding to (and anticipating) what consumers want. The development of the e-vapour category has shown that there is significant consumer interest and demand for these products already, with potentially much greater demand as the products improve and regulators get clearer messages across to consumers regarding their risk relative to combustible cigarettes;

Companies that stand still and refuse to innovate eventually go out of business. The tobacco industry has been remarkably immune from competitive pressures and disruption for the last 50+ years, but is now facing many of the same dynamics faced by other consumer companies. Any tobacco company that doesn’t invest in next-generation products is jeopardising its future;

There is a significant profit opportunity. PMI is predicting that it will approach breakeven on its next-generation products in 2017, and that there is the potential for $700-$1,200m of profit by 2020 (for context PMI produced $11bn of operating profit in 2015, so that would represent a material contribution for a segment which would still really be in its infancy). In a recent presentation to analysts, BAT also reiterated that there is as much profit potential per normal user for novel products as there is for cigarettes.

Finally, it’s the right thing to do. Tobacco companies have been demonised for decades now, and having the chance to sell and develop products that can make a big contribution to public health goals is a major motivational factor for them and their employees.

38 comments to How does Big Tobacco see its future? Guest blog by Jonathan Fell

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[…] Jonathan Fell: How does the tobacco industry see its future? (Godshall comments on tobacco company lobbying for FDA s vapor ban, and for state vapor taxes/regulation) http://www.clivebates.com/?p=4503 […]

Thanks for an interesting post. And the comments on it are as interesting and informative as the original article! I’ve learned a lot.

As someone who has just been given a tentative diagnosis of early COPD and who knows that she MUST stop smoking ASAP, and who knows that her only hope of doing so is the e-cigarette (NRT just has not worked for me and I’m NOT willing to try Chantrix when I have a history of depression), I am praying very hard that these products will persist in the market and improve over time.

So I have been really worried by the potential impact of the TPD and the FDA deeming regs and Australia’s oppressive anti-vaping legislation. I am a little heartened by the view that at least some big tobacco companies may be really invested in developing decent vaping (or similar) products.

I am kicking myself so hard that, having discovered vaping and finally been able to quit smoking for 6 weeks (a miracle!) I then allowed myself to go back to smoking at a bad time (depression about the state of the world, the bad press around e-cigs, etc. etc. – YOU know). And then, having regained some of my mojo (thanks, Royal College of Physicians and Louise Ross) and wishful to stop smoking again, I found to my horror that my stupid lungs would happily accept smoke from burning tobacco but forcefully rejected the much-less-harmful vapour from an e-cig.

Sigh. Well, you can’t change the past, you can only do your best to make the future better.

On advice from the staff in my local pharmacy (lovely people!), I am trying a very low nicotine e-liquid – which my lungs will just about tolerate, – supplemented with additional nicotine from a Nicorette Quickmist when necessary. Fingers and toes crossed that I can do this.

And thank goodness for e-cigarettes.

And for all the good people. like Clive, who have fought and are still fighting to get them a fair press!

@Irish Lass,
I am genuinely sorry your lungs don’t agree with the vape. Consider trying “snus” that you can find in pretty “punchy” mini pouches that are totally invisible, with just a few tries of practice. I don’t know them but you could consider ordering from @snus_manchester. An added benefit is that you get to feel really “naughty” as the products themselves are totally banned in the UK, despite being safer than vaping (on paper). By on paper I mean that 75 million user years in Sweden over 100 years has not generated any clinical records suggesting any serious detrimental health effects whatsoever. Buy a can and give it at least 10 tries (portions) to get the hang of it, preferably right at the moments when you would literally kill for a fag.

I am a genuinely law-abiding person, so had not thought about trying to get hold of snus……but maybe I shall put my health higher than the law in my priorities for once!

I had a shock when I went for my first week check-in at the pharmacy stop smoking service: to sum it up, I had cut down from 2 packs a day to under a pack a day for a week and was feeling pleased and quite proud of myself, and eager to try cutting down further; and I was told to go away until I was ready to stop completely and then come back. Soooooo de-motivating and upsetting that I smoke 3 cigarettes in the car on the way home before I caught myself on at this childish reaction. I am determined to stop!

Simon Chapman wrote:
“The very last thing that Big Tobacco hopes for harm-reduced nicotine products is that they will cannibalise their mainstay cigarette markets. Instead, the business model is dual use (people smoking where and when they can smoke, and vaping when they can’t).”

While I think Simon’s advocacy of vapor and snus sales bans has been unethical and inhumane public health malpractice, Simon’s description above is a fairly objective and accurate portrayal of the strategy deployed by Lorillard, Reynolds and Altria in the US ever since Lorillard’s Murray Kessler wisely bought blu four or five years ago.

There are two distinct market segments of the vapor industry:

– The “Cigalike” segment (disposables and replaceable cartridges) has been heavily and almost exclusively invested in by tobacco companies (blu, Mark Ten, Green Smoke, Vuse), are primarily sold in convenience stores, are primarily used for dual usage when/where smokers cannot smoke, but aren’t very effective for helping smokers quit smoking or sharply reduce their cigarette consumption.

– The “Premium Vaporizer and E-liquid” segment, in sharp contrast, has helped millions of smokers quit smoking and/or sharply reduce their cigarette consumption, and they are sold primarily in vape shops and online.

Although cigalike e-cigs aren’t very effective for quitting smoking, they have been very effective in getting smokers to try (experiment with) vaping. The vast majority of vapers who quit smoking began vaping with a cigalike, then (after several days, weeks or months) switched to a Premium Vaporizer and E-liquid, which got them to quit smoking and/or sharply reduce their cigarette consumption.

By marketing cigalike e-cig to smokers to use when and where they cannot smoke, and by endorsing FDA’s Deeming Regulation (that will ban the sale of >99.99% of the 100,000+ vapor products currently on the US market on 8/8/2018, and will likely ban the sale of all Premium Vaporizers and e-liquids), the cigarette companies have positioned themselves to become the biggest winners of FDA’s Deeming Regulation sweepstakes (as it protects their cigarettes and their cigalike e-cigs from market competition by Premium Vaporizers and e-liquid, while most of the $10+ million PMTAs for vapor products will be submitted by tobacco companies for their cigalike e-cig brands).

Regarding vaping taxation, Reynolds has now successfully lobbied three state legislatures and governors (NC, LA, KS) to tax e-liquid by the milliliter.
The vapor tax in those states was NOT being pushed by Big Pharma funded anti vaping groups (i.e. CTFK, ACS, AHA, ALA), but rather was solely lobbied for by Reynolds. Vapers and the vaping industry, however, did coalesce to defeat similar Reynolds e-liquid tax proposals in other states (including OK and RI).

When state legislatures have taxed vapor products, they typically license all vapor retailers, wholesalers (often including manufacturers) the same as they license cigarette retailers, wholesalers and tax stampers (to ensure payment of taxes). Many state tobacco licensing laws are more than 30 pages long, and can cost vape shops more money to comply with (in legal and accounting fees) than the tax that is imposed on their e-liquid. Many states also prohibit certain people (e.g. convicted felons) from obtaining a license, while other states require licensees to post bonds.

In regards to workplace vaping bans, I’m not aware that any tobacco company has ever endorsed a workplace vaping ban, and I’d be shocked if that occurred. The only time a tobacco company actively lobbied against a vaping ban (a Reynolds lobbyist at a 2014 Philadelphia City Council hearing/meeting), he did not help (but rather he hurt) our efforts to defeat the ban (and he knew it).

Hi Bill,
Thanks again for responding, I’m going to reply to both of your 27th/28th Nov comments here:
As I think you’ve highlighted, tobacco companies have to make money for their shareholders in a sustainable way, and they cannot only be about public health goals. It’s very clear that public health itself is split on the topic of harm reduction, and there are differences of opinion even within those who support harm reduction. So it’s normal that sometimes harm reduction advocates will find themselves disagreeing with what tobacco companies decide to do.
I think it’s a little harsh to put so much of the blame for the FDA’s position on the tobacco industry. To the extent the FDA’s position is wrong-headed, surely a lot of the blame must lie with the FDA itself? Stepping out of my own zone of competence slightly it might also be a bit of a stretch to say that the ‘goals’ of the FDA Deeming Regs and Tobacco Control Act are ‘to ban the sale of new THR products . . .’
I agree with your views that Altria, in particular, might initially have regarded FDA regulation as not a bad thing, and something that might protect their cigarette business. But I’m not convinced they’d take the same view now given the opportunities that e-cigarettes and other reduced-risk products present for future growth.
The lobbying for different smokeless tobacco tax schemes has gone on for well over a decade; Swedish Match and UST were fighting the same battles 20 years ago when SWMA’s Timber Wolf made the running at the bottom of the market, prior to the launch of Grizzly by Conwood. Neither these tax manoeuvrings nor the arrival of FDA regulation has stopped the continued solid growth of the moist snuff category.
I’m not sure I agree with your suggestion that ‘cigalikes’ are aiming for dual use. I think the tobacco companies invested in these sort of products initially because this is where the largest brands were available for purchase and the business model was also closer to their existing business – something they could understand. If, as you say, consumers try cigalikes first then move on to premium vaporizers and largely quit smoking, then a strategy of aiming for dual cigarette / e-cigarette use by selling cigalikes isn’t a very successful one.
I also don’t think that the tobacco companies do endorse the Deeming Regs as they are being applied (you mentioned in your 26th Nov comment that Altria and Reynolds are supporting the grandfather date being moved to 2016). I think any hope that tobacco companies could somehow limit the US e-cigarette market to cigalikes in the long run and dominate it themselves is fanciful, and not a plan I can imagine any sensible board endorsing.
I believe that if consumers want premium vaporizers and e-liquids, somebody’s going to find a way to sell it to them eventually, whether supplied by a tobacco company or another competitor. Imperial, BAT Reynolds are already selling non-cigalike vapor products. Also remember that most US tobacco companies (if you count BAT / Reynolds and PMI / Altria as related via technology-sharing and, in the case of BAT/RAI via ownership) have an involvement in international markets where they are having to compete in e-cigarette markets without the ‘benefit’ of Deeming Regs.

Jon wrote:
“I think it’s a little harsh to put so much of the blame for the FDA’s position on the tobacco industry. To the extent the FDA’s position is wrong-headed, surely a lot of the blame must lie with the FDA itself?”

I wasn’t blaming tobacco companies for the FDA Deeming Regulation (as they simply took advantage of the huge cigarette protection gift FDA’s Mitch Zeller proposed). As I’ve repeately said since 2009, virtually all of the blame goes to Obama appointees at DHHS and their Big Pharma funded partners CTFK, ACS, AHA, ALA, AAP, Legacy, etc., whose key goal was to protect Big Pharma drugs and their smoking cessation programs from market competition from vapor products.

I repeatedly urged FDA officials to not ban vapor products in 2009, and I assisted SE and NJOY owners and lawfirms in their litigation that struck down FDA’s unlawful e-cig ban (including filing an amicus brief against FDA and in support of SE and NJOY with the DC Court of Appeals in 2010).

Since 2009, I attended and spoke in support of vaping at about a dozen different FDA CTP meetings/conferences, and I submitted thousands of pages of comments to a dozen different FDA CTP dockets delineating the many health benefits of vapor products, and criticizing Obama’s DHHS for banning and lying about vapor products. In response, Obama’s DHHS has doubled, tripled and quadrupled down on their fear mongering about vaping.

After fourteen months (on the day FDA formally proposed the Deeming Regulation), FDA’s Mitch Zeller responded to our petition by falsely claiming:
“While we are seeking to regulate products like electronic cigarettes, the proposed regulation would not ban them.”

A collaboration between Big Pharma and Big Tobacco, as suggested by Bill Godshall, is interesting, but not likely, and it is definitely not the impression you get when reading the mails between the EU-commission & the industry lobbyists during the 2013-preperations of the TPD. These mails have been made public by a FoI request by Neil Mclaren:

These mails make it very clear that Big Tobacco and Big Pharma are positioned on each side of the fence: Big Tobacco were consistenly lobbying for less heavy-handed regulation on E-cigs as well as on tobacco products and also warned that the commission’s tough E-cig regulation proposals would diminish the E-cig’s harm reduction potential. One of many examples:

It is a widely spread misunderstanding in the vaping community that the tobacco industry is “afraid of E-cig competition” – clearly that is not the case. The tobacco industry sees the E-cig as a great new opportunity to attract customers, and maybe even get rid of its “bad-guy” public image. It should also be noted that total E-cig sales is still very low compared to traditional cigarette sales, below 10%.

Those who are really worried about E-cig competition (apart from Big Pharma) are the EU-governments who will lose trillions of € in tobacco taxes, and more in the future if it turns out that vapers live longer than smokers, which of course remains to be seen.

Thanks Klaus for your very interesting reply, I hadn’t actually managed to find those documents before. As you say, they seem to suggest that tobacco companies did not use the EU TPD process to try to ‘kill off’ e-cigarettes.
More good reasons to have been glad I wrote this post – I have learnt a lot from the replies!
Jon

Thanks, Jon. I suggest you look into the TPD-process through the FoI requests that have been made public so far. They tell quite a different story than the one-sided story being put out in the media. Some of the requests are here, and you can find links to others at the right side of these pages:

I tripped over a very amusing correspondence between one of the medicine/pharma funded lobbying organisations, “The Smoke Free Partnership” and the EU-commission about the public online TPD-consultation in 2010. As you may remember this consultation had a huge turnout of about 85.000 people, and roughly 96% of them did not want any new tobacco rules or regulations and no new TPD. And just as many also wanted snus to be legal all over the EU.

Shock & horror in Brussels! No new tough tobacco rules? What to do? Well – read this:

As one who, since 2008, has urged and helped convince all of the large tobacco companies to begin developing and marketing e-cigarettes (except PMI, whose scientists have insisted to me since 2012 that their new heat-not-burn product [i.e. iQOS] was even better than vaping), I wasn’t surprised those companies acted in their own selfish financial interests (as that’s what companies do) by endorsing and embracing FDA’s cigarette protecting Deeming Regulation.

Jonathan wrote:
“But in seeking to ‘win’ in the next-generation category I’m not sure they have a particular obligation to protect the market position of smaller competitors – though of course they have to obey competition law and should respect other customary business behavioural norms. From a public health perspective what matters most is that next-generation categories with much lower levels of risk grow as large as possible relative to cigarettes.”

Except that the primary and secondary goals (for Philip Morris/Altria and GSK/J&J/Pfizer) of investing hundreds of millions of dollars lobbying for both the Tobacco Control Act and FDA’s Deeming Regulation was/is to protect PM’s/Altria’s cigarettes and Big Pharma’s FDA-approved drugs from market competition (i.e. crony capitalism) by low risk smokefree tobacco/nicotine alternatives.

From 2004-2009, Reynolds joined with me and other THR advocates in opposing the TCA, and even referred to it as the “Marlboro Protection Act”.

From 2004-2007, Swedish Match and UST joined with me and other THR advocates by opposed the TCA because it protected cigarettes from market competition by smokeless tobacco. But UST’s Murray Kessler endorsed the TCA in 2007 (after cutting a deal with Waxman to allow smokeless tobacco sampling at some adult only venues) a few months before he made lots of money by selling UST to Altria. Sadly, UST convinced Swedish Match to also endorse the TCA in 2007.

While none of the tobacco companies endorsed FDA’s unlawful e-cig ban in 2009, I suspect Altria would have again joined forces with Big Pharma funded CTFK/ACS/AHA/ALA in urging FDA to ban e-cig sales (had Altria known then that e-cig sales were about to skyrocket). But at that time, nobody in the cigarette industry took e-cigarettes seriously, as I many people laughed at me at the 2010 TMA conference when I first predicted that e-cig sales could surpass cigarette sales by the end of the decade if FDA’s 2009 ban was struck down by the court (as it was in 2011).

Regarding self interest taxation, for the past decade, Reynolds and Altria have been lobbying against each other for different smokeless taxation schemes that protect/benefit their own brands at the expense of competitor brands.

Altria has lobbied state legislatures to tax smokeless tobacco by weight (i.e. by the ounce), while Reynolds has lobbied those same state legislatures to keep smokeless tobacco taxed via ad valorem (i.e. percent of price). The reasons for this are simple mathematics, as Altria primarily sells premium priced Skoal and Copenhagen, while Reynolds primarily sells discount Grizzly.

Although Reynolds has been lobbying states to tax e-liquid by the milliliter
(to protect/benefit Vuse at the expense of competitor open systems, e-liquid and vape shops), I’ve been pleasantly surprised that Altria has not yet endorsed any of Reynolds’ vapor tax bills.

While the vaping industry and the tobacco industry agree and collaborate on many policy issues, nobody in the US vaping industry trusts the large tobacco companies (regarding FDA regulation) any more than they’ve trusted Obama’s anti-vaping appointees at DHHS or Big Pharma funded CTFK, ACS, AHA, ALA, AAP.

The best way for THR to advance in the US is by repealing the FDA Deeming Regulation, and the second best way for THR to advance in the US is by repealing the Tobacco Control Act, as the goals of both laws were/are to ban the sale of new THR products, to ban truthful claims about existing THR products, and to impose false fear mongering warnings on THR products.

Unfortunately, large tobacco companies are very likely to continue acting in their own selfish financial interests by joining forces with Big Pharma shills to oppose our efforts to repeal the FDA deeming regulation.

While I agree with most of Jonathan Fell’s posting, the cigarettes companies have endorsed and lobbied for many different laws and regulations that protect cigarettes from market competition by low risk vapor and smokeless tobacco products.

In 2002/2004, Philip Morris negotiated and agreed to (with CTFK’s Matt Myers, GSK lobbyist Mitch Zeller, Henry Waxman and Ted Kennedy) lobby US Congress to enact the Tobacco Control Act that banned the sale of all new low risk tobacco products on 2/15/2007 (the original TCA bill banned sales of them in 2003), banned smokefree tobacco products from truthfully claiming they were less harmful than cigarettes, and required even larger false and misleading warnings on all smokeless tobacco products.

From 2010-2014, Altria, Reynolds and Lorillard endorsed FDA’s MRTP guidances
and recommendations for submitting MRTP applications to truthfully claim smokeless tobacco products (and e-cigarettes via the deeming rule) are less harmful than a cigarette, which I’ve called FDA’s “ten million dollar truth tax” since 2011.

In August 2014, Altria urged the FDA to impose a defacto ban on all “open tank systems” and “e-liquids” that are sold separately to consumers by urging FDA to:
– “require manufacturers of non-tobacco components and parts that are sold directly to consumers to be subject to . . . premarket authorization requirements” and other FSPTCA requirements,
– “apply premarket authorization and constituent reporting requirements to manufacturers of empty “tanks”, “tank systems”, and other e-vapor components intended for distribution or sale directly to consumers . . . in a way that accounts for each probable combination of tobacco-derived nicotine-containing liquid and each such “tank” or “tank system” and the aerosols produced by such combinations.”
– analyze “the interaction between a particular liquid and any empty “tank” or “tank system” and any liquid which could be used therein.”
– define “finished tobacco product” to differentiate “components, parts or raw materials” from tobacco products that are ready for human consumption,
– define “component and part” as any “raw material, additive, substance, piece, item, unit, section, assembly, or sub-assembly that is intended for incorporation into a finished tobacco product, ”
Regulations.gov

Lorillard (whose website disappeared after its sale to Reynolds) also endorsed FDA’s proposed Deeming Regulation to ban vast majority of e-cig products marketed by smaller competitors, but urges agency to allow SE Reports (instead of requiring New Tobacco Product applications) for all e-cigs on market prior to issuance of Final Rule.

Although Altria and Reynolds supported the Cole bill and the Cole-Bishop amendment (to change the grandfather date for new tobacco products from 2007 to 2016), they continue to support the rest of FDA’s Deeming Regulation.

While many vapor companies have filed lawsuits challenging FDA’s Deeming Regulation, none of the cigarette companies have done so.

Due to the election outcome, most of the US vaping industry is likely to urge the Trump Administration and US Congress to repeal FDA’s deeming regulation,
the large cigarette companies are likely to just continue pushing the Cole bill.

Regarding taxation of vapor products, in 2014 Reynolds began lobbying state legislatures to tax vapor products (by the milliliter of e-liquid, not by ad valorum taxation) to impose much higher taxes on e-liquid sold by vape shops than are imposed on Reynold’s Vuse.

Last year in Minnesota, Reynolds lobbied the MN legislature to change the 95% ad valorum tax on e-cigarette products to instead tax e-liquid by the milliliter, which if enacted would have sharply reduced the tax on Vuse while sharply increasing the tax on e-liquid sold in vape shops.

Bill,
Many thanks for your comment, which I found really helpful in explaining the background of some of these regulatory issues in the US; you’re clearly a lot more familiar with the detail than I am.
In addressing the very valid questions raised by Luc Van Daele we’ve shifted a bit from the question of whether tobacco companies are serious about next-generation products relative to their legacy cigarette business, towards how they approach competition within the new nicotine and tobacco categories.
I think tobacco companies have important societal obligations when it comes to the question of how to treat next-generation products relative to their cigarette business (ie they need to be serious, and not cynical, about it). But in seeking to ‘win’ in the next-generation category I’m not sure they have a particular obligation to protect the market position of smaller competitors – though of course they have to obey competition law and should respect other customary business behavioural norms. From a public health perspective what matters most is that next-generation categories with much lower levels of risk grow as large as possible relative to cigarettes.
In relation to the first part of that, as far as I can recall Philip Morris USA’s role in the earlier 2000s regarding low-risk products / snus etc was, as you say, inglorious, though I think it has modified as they’ve become involved in snus and e-cigarettes.
On the second part there are a few other points I’d make:
• I was aware of the August 2014 positions of PM USA and Reynolds in relation to open systems and I do think they were ill-advised. From conversations I’ve had with various people I think the Reynolds position may have moved somewhat since then, though I don’t have a document I can point you to which proves it. Also note that BAT, which sells open system products in a number of markets including the UK and Poland, is bidding for the 58% of Reynolds that it doesn’t already own.
• Lorillard’s vapour business, blu, is now owned by Fontem Ventures, part of Imperial Brands, and blu seems to be marketing at least some semi-open products (eg liquids and refillable tanks).
• I think it’s inevitable that the FDA would want to regulate both premium and other cigars, and I’d say that Middleton cigars are aimed at quite a different user / consumption occasion compared to premium cigars – so I don’t think Altria would get much, if any, benefit from smaller premium cigar companies going out of business.
• Given that tobacco companies are already regulated by the FDA and therefore already have a complicated relationship with the agency, I think it’s difficult for them to challenge the FDA’s authority to regulate e-vapour, either before or after deeming. Also, imagine what mischief the ‘nitwits’ would make if they did . . . for instance, this New York Times article, which when I first saw it had the title of Tobacco Industry Works to Block Rules on E-Cigarettes. Maybe they feel that focusing on trying to move the grandfathering point to a more reasonable date is the best practical thing they can do to alter the FDA’s ridiculous approach.
• When the debate gets down to what type of excise tax is levied, I definitely think that is part of the normal cut and thrust of competition. Most tobacco tax is specific rather than ad-valorem (pretty much 100% in the US, and the same applies to liquor), and the idea that if something attracts excise it should attract the same excise regardless of how those selling it decide to price seems to be a defensible position. I’m not familiar with how Vuse was priced relative to e-liquids in Minnesota last year, but perhaps Reynolds might argue that the ad-valorem excise system was disadvantaging their product, rather than it being a case of them seeking to gain an unfair advantage over e-liquids.
All that said, I think it’s very useful for those of us on the financial side of things to be reminded of what tobacco companies are getting up to on the lobbying front by people who really understand what’s going on; if the actions of these businesses don’t match what they’re saying publicly with regards to responsibility, sustainability etc then we need to know.

The tobacco industry as a whole is has progressively recognized the stewardship role it has to its consumers, towards its products and to society in general. The culture of the industry as a whole has changed markedly in the past 15 years, as has the recognition from companies that they all have a more important role to play in developing new products that better meet societal goals and adult consumer needs. The emergence of small dynamic companies who have challenged the conventions of the industry and who have driven new markets and new product innovation have helped significantly in changing industry norms and conventions – lets hope small business is strong enough to continue to innovate among the behemoths in the brave new world of reduced risk products.

This is interesting – especially on new vaping techonologies – but fails to answer my big question: to what extent is the industry dependent on tobacco/cigarette production specifically? There are massive amounts of capital tied up in production facilities and supply chains that can’t readily be adapted to e-cig production, and within that a certain profit model. This has already resulted in the tobacco industry being out-flanked by small e-cig producers who can move and adapt more speedily to consumer demand. And surely it exerts a brake on how quickly, and willingly, the industry embraces vaping.

Hi Phil,
At the moment the tobacco industry is still very dependent on combustible cigarettes for its profits and cash flows, which is inevitable given the size of the vaping / next-gen market relative to the legacy business.
I think the supply chain thing is less of an issue. Cigarette volumes have been shrinking in lots of markets for years now, so tobacco companies have become very used to shrinking their manufacturing base. New capital has to go into production facilities for vaping or heat-not-burn products, and that could be very substantial, but that’s not a problem as long as the profitability of these categories is broadly similar to cigarettes.
In the PMI investor presentations I mention in the blog, CEO Andre Calantzopoulos said that each 1bn increase in capacity to product ‘heatsticks’ for their iQOS product would cost $16-18m. But that each 1bn heatsticks might bring in $57m or revenue, assuming they’re priced in line with cigarettes.
There’s also quite a lot of interesting detail in the PMI presentations about how they are realigning their sales force in Japan to market / communicate the iQOS product more effectively to consumers. That’s a vital bit of getting products to consumers and adapting that part of the existing business to new products requires training rather than substantial capital investment.
Finally, I think big businesses, in the consumer world anyway, always tend to be slow in spotting and reacting to emerging trends in their very early stages – but often better at taking them up and commercialising to their full potential.

Jonathan
A mate of mine is involved in fairly larege scale manufacturing in China ( cleaning products). Consequently he is in contact with the groups that make the robots and machinery that is the heart of any modern factory. He was recently told that their manufacturing of the machines ,needed for massproduction, of the latest models of ecigs is growing like crazy ” flat out”

A thoroughly superb article that neatly dissects Chapman’s counters and offers a real-world basis in fact.

I for one am glad that the Tobacco Industry is investing, and investing heavily, in R&D for RRPs (including e-cigarettes). By leveraging their strengths to market (distribution chain and huge financial impetus) they will be providing a much needed aspect: choice.

There has been, and continues to be a distinct disconnect in the e-cigarette market – mostly between the “hobbyist” and those looking at e-cigarettes as either an alternative to, or to quit, smoking (both aspects are laudable).

As David Sweanor has succinctly pointed out, many within Tobacco Control and (in certain cases) Public Health, view the Tobacco Industry as the root of all evil – dragons to be slayed. That really is no longer the case. Sadly, certain individuals either haven’t realised that yet, or don’t want to realise it.

My thanks to Jon Fell for his insights, and to Clive for hosting the post.

Excellent article from a different perspective. I can’t say I’m particularly enthusiastic about aspects of big tobacco’s involvement in the vaping market (e.g. the lobbying against open systems) but it is here to stay.

As for Chapman and his ilk, I suspect that they have little experience of life outside their academic bubbles, and so have a rudimentary and flawed understanding of how industry works. Add in a tendency amongst that group towards Marxist political views and “big tobacco” becomes (in their view) a demonic enemy who must be destroyed.

Jon, I responded a bit on the open systems point in my reply to Luc Van Daele. If you have recent examples of tobacco companies continuing to lobby aggressively against open systems I’d be very interested to hear – this is an area I’d like to know more about.

Hi Jon, thanks for responding. The best example I can think of that is out in the open is the case of Reynolds American calling for open systems to be banned, and that came to light in 2014. Also I recall one of the tobacco industry bodies (TVECA) argued strongly for TPD Article 20 in the form that was accepted for the directive, which was opposed by vapers and most small vaping businesses. The TPD will put severe restrictions (albeit not totally ban) open systems in Europe. I see Bill Godshall has given much more detail of happenings in the US below.

I absolutely agree with your comments that for a tobacco company, closed systems really have to be the way to go, and they should be looking to make their products competitive in their own right, rather than trying to snuff out competition through lobbying for regulation. I just can’t see the vapour market that I am familiar with (mods, tanks, e-liquid in endless flavours…) being particularly attractive to large tobacco companies.

This is a terrific overview of a critically important issue. In my experience, the failure to understand the tobacco industry is a major cause of a long history of own-goals by anti-tobacco campaigners.

An objective analysis of the companies makes for far more intelligent interventions than the cartoonish caricature that often prevails in the field.

It is sad enough that self-styled opponents of the cigarette business unknowingly do things on a regular basis that protect the cigarette trade. It is worse that they knowingly refuse to re-evaluate their views.

“the failure to understand the tobacco industry is a major cause of a long history of own-goals by anti-tobacco campaigners.”

That failure, of course, is a byproduct of the larger failure of totally excluding the biggest and most important group of stakeholders (e.g. tobacco users themselves) from having any input on tobacco policy.

Big Tobacco Control’s biggest coup was in eliminating everyone from the conversation except themselves and their useful idiot lackey politicians. Smokers (indeed, all tobacco users of any kind) were written off as hopeless “drug addicts” whose opinions couldn’t possibly matter because their “addiction” rendered them incapable of objectivity and reason. And by the same token, tobacco companies themselves were the moral equivalent of the corner crack dealer, concerned with nothing but turning little kids into nicotine junkies, so obviously they can’t have anything pertinent to offer to the discussion.

Thanks David. I’m always surprised by how much information produced by the tobacco industry – expecially in financial communications – is simply ignored by anti-tobacco compaigners. There’s a tremendous amount of stuff about basic industry dynamics that people can learn.

I totally agree. There is a wealth of publicly available information, and I started accessing it very early in my career. Securities and Exchange Commission filings are particularly good, but so are annual reports, quarterly reports, presentations to analysts, reports from analysts, etc. More recently, the science produced by the companies has also not only been of high quality but gives a good indication of corporate directions.

Public companies tell the world a great deal about what they are doing, what they plan to do, and what things harm or help them. Ignoring it all in favour of a silly caricature of ‘the industry’ requires an extraordinary commitment to self-imposed ignorance. Misrepresenting critical information from such sources is worse. It shows that the person knows the information exists but rather than using it to advantage opted to impose their ignorance on the unwary. If it were only their reputations, rather than the lives of so many others, that were on the line, the actions of such self-styled enemies of the companies would be funny rather than tragic.

In short Chapman is a nitwit, but tell us something we didn’t know already. What is the position of the tobacco industry who opted almost completely for closed propriety systems vs the independent industrie who opted for open systems? What is the position of the tobacco industrie towards the tightly related taxation issues of those choices? Convenience is key for the big mass of smokers who which to switch, but if it saves you a very nice exotic holiday each year in taxes, some, or more likely many, will opt for the slightly less convenient open systems. How is the tobacco industrie going to react not as such towards a black market, but towards an uncontrollable brew-it-yourself-almost-for-free-in-your-back-kitchen market that will arise massively after taxation? Chapman is a nitwit, we know, but he’s no excuse to avoid the real and important issues…

Hi Luc,
Those are important questions, and not ones I was deliberately seeking to avoid answering – more just a question of space; perhaps topics for a future blog piece.
On tax the position of the tobacco industry, whose views are of course not always unified, is somewhat opaque as far as I’m concerned, but in general terms seems to be ‘we’re not against tax on vaping (or heat-not-burn) but tax should also reflect relative risk, such that higher-risk products are taxed more heavily’. But I stand to be corrected . . .
Things to consider are:
• Would it be smart of the tobacco industry to lobby for heavy taxes on e-cigarettes / e-liquids in order to protect consumption of their existing cigarette business? In my view: no, because that would jeopardise the growth of vaping at a time when it’s important for the future of the category to get people switching. It also makes them enemies in the vaping community, which is unhelpful.
• Would it be a sensible tactical move for the tobacco industry to oppose all taxes on vaping / heat-not-burn products? Probably not, in my view. Of course that position would attract support from vapers, but it would also allow less constructive public health elements to paint the industry as irresponsible, anti-regulation, cynically trying to get a lot of people addicted to nicotine at a lower price, etc.
• Is there a practical case to be made for governments having more ‘buy-in’ to the success of vaping and other novel nicotine / tobacco categories if they are also generating excise tax from those products (albeit at a lower level than for cigarettes)? Most governments are short of cash, probably now more than ever. Also, finance / excise people are often the only government departments who will speak to the tobacco industry at all (Article 5.3 of FCTC etc) so the companies are naturally keen to stay on-side.
On the open systems point:
• I think it’s dumb for tobacco companies to lobby for regulation which very significantly restricts the use of open systems (and I don’t think many of them are now – although, again, I stand to be corrected). Businesses reliant on regulations to artificially boost the attraction to consumers of their inferior product are weak, and not ones I’d want to invest in.
• That said, it’s obvious why a closed system model potentially has more attraction to a fast-moving consumer business, because it might be easier to build brands and lock in repeat purchase.
• A major attraction of closed systems for consumers is that well-designed ones can be simpler to use. I know open systems dominate at the moment, but also for the moment vaping accounts for a relatively small part of the overall nicotine market, and one of the reasons might be that open systems can be a bit complicated to use, while closed systems don’t deliver a satisfying-enough experience.
• If this is going to work, I think closed systems have to win on their own merit, and consumers have to select them by choice rather than through coercion. So that’s where the tobacco industry’s efforts need to be focused.
• All of which isn’t to say that if closed systems eventually come to dominate consumption, open systems should disappear – again, I think consumers should be offered choice.

The early e-cig industry of Hon Lik’s Ruyan and all the copycat companies adopted the tobacco business model for their companies in the hope for a buy-out by BigT, but this was unsatisfactory for many reasons to the consumers. A couple of unknown and obscure companies like Joyetech (at that time in partnership with Janty) took the bald move in 2007-2008 to change this in a consumer driven model, and this has been proven to be a smash hit for them. If only I would have taken my own advice and bought some Joyetech stock back then…

I’m under the impression that the core business of the tobacco industry is no longer selling tobacco, but collecting taxes and being paid a commission for it. Today for e-cigs it even seems that every big tobacco company no longer writes its own business plans but copied the one written by ex Commissioner Tonio Borg = ‘level the playing field by imposing the same monster taxation on e-cigs as on tobacco’.

But it’s going to be an interesting battle the next couple of years between BigT who is still transposing its tax driven business model of tobacco onto e-cigs and the independent e-cig industry that was forced by popular demand to change to a consumer driven model. In a free competitive market I would know where to put my money on, but now it’s a regulation driven market. As you put it “Businesses reliant on regulations to artificially boost the attraction to consumers of their inferior product are weak”.

“… and the position of virtually all of them is that they oppose sudden and steep increases, … because of the obvious risk that they exacerbate black market problems.” Here lies the biggest problem and challenge for the BigT-BigGov co production. For the current vapers a 80% tax like in Italy was indeed a sudden and steep increase that killed the local market in one single day, because vapers just started to buy there products elsewhere. To the future vapers however such a monster tax would make no difference at all to their current situation as smokers; and that specific market segment of people who have no interest in forums and politics is the future mass market.

Let’s hope that public health is right and people only switch for health reasons and harm reduction and have no other motivations. And let’s hope that the mass market will stay uninterested in forums and politics even if there is already a legion of millions, growing by the day, who already know the way out of the entrapment. Let’s also hope smokers are not fed up with the amount of tax they have to pay on a recreational consumer product like tobacco. And let’s hope that quitting smoking is perceived exactly the same as smoking and can be fitted into the same business model of punitive sin taxation. So fingers crossed for BigT and their state protected taxation business model… The near future will tell if it worked well or backfired badly like in Italy… But I do have a hunch the history of 2007-2008 when the Chinese market was forced to change on popular demand, is about to repeat itself.